Regressive tax explained

Under the Irish tax system, certain types of regressive tax may be levied on income. To understand the types of taxes that you may be subject to, it’s important to first have a look at regressive taxes, progressive vs regressive tax, and the impact regressive tax has on income earners. 

In Ireland, a regressive tax is one that everyone pays the same, regardless of how much they earn. This means that the percentage of income paid as tax is higher for those with lower incomes. For example, as illustrated below, people with a higher income end up paying a smaller portion of their money in these taxes compared to those with less money.

This happens because lower-income individuals need to spend a bigger chunk of their money on essential things like food, housing, transportation, and healthcare. Since they earn less, these basics take up a larger part of their income compared to people who earn more. So, even though everyone pays the same regressive tax rate, it can hit lower-income earners harder.

In Ireland, a progressive tax is the opposite of a regressive tax. When a tax is progressive, it goes up as you earn more money.

A good example is income tax, where there are different tax rates for different income levels. As your salary increases, the amount of income tax you pay also goes up. This means that people who earn more money end up paying more in taxes. Income tax takes into account your individual finances.

On the flip side, regressive tax is a fixed amount that doesn't consider how much you earn. While regressive tax can hit low-income individuals harder, progressive tax affects those with higher incomes. If you have a higher income, you'll pay a higher tax rate compared to those with lower incomes. The idea behind progressive tax is to ensure that people with lower incomes don't have to spend an unfair portion of their money on taxes.

In Ireland, some types of regressive taxes include:

Value Added Tax (VAT)

• VAT is a consumption tax applied uniformly to a wide range of goods and services

• It is a percentage of the purchase price, and everyone pays the same rate regardless of their income level

Excise Duties

• Excise duties are taxes on specific goods, such as alcohol, tobacco, and fuel

• As these duties are typically fixed amounts per unit, they can have a regressive impact, especially for lower-income individuals who may spend a higher proportion of their income on these items

Local Property Tax (LPT)

• The LPT is based on the value of residential properties

• While it is not directly linked to income, it can be considered regressive as those with lower incomes may allocate a larger portion of their earnings to housing costs

It's important to note that the overall tax system in Ireland includes a mix of progressive and regressive taxes. While income tax tends to be progressive, consumption-based taxes like VAT can have a regressive impact, affecting lower-income individuals more significantly.

Consider two individuals – one with an income of €1,500 and another with an income of €5,000. Both spend money on goods subject to a 23% VAT.

Even though both face the same VAT rate, the lower-income individual pays a higher percentage of their income in VAT. This highlights the regressive impact, as lower-income individuals bear a heavier burden relative to their earnings.

If you look at every purchase with sales tax in a month, you'll see how regressive taxes hit low-income earners more. These taxes are the same for everyone, no matter how much you earn or your tax bracket. Because of this, people with lower incomes end up spending a bigger part of their money on these taxes, making it tougher for them financially.